Question

Submit a paper which is 2-3 pages in length (no more than 3-pages), exclusive of the reference page. Paper should be double spaced in Times New Roman (or its equivalent) font which is no greater than 12 points in size. The paper should cite at least two sources in APA format. One source can be your textbook. describe the circumstances of the following case study and recommend a course of action. Explain your approach to the problem, perform relevant calculations and analysis, and formulate a recommendation. Ensure your work and recommendation are thoroughly supported.

Case Study:

A vacuum manufacturer has prepared the following cost data for manufacturing one of its engine components based on the annual production of 50,000 units.

Description Cost per Month

Direct Materials $75,000

Direct Labor $100,000

Total $175,000

In addition, variable factory overhead is applied at $7.50 per unit. Fixed factory overhead is applied at 150% of direct labor cost per unit. The vacuums sell for $150 each. A third party has offered to make the engines for $60 per unit. 75% of fixed factory overhead, which represents executive salaries, rent, depreciation, and taxes, continue regardless of the decision. Should the company make or buy the engines?

Superior papers will:

- Perform all calculations correctly

- Articulate the approach to solving the problem, including which financial information is relevant and not relevant.

- Correctly conclude on whether the company should make or buy the engines.

Propose other factors tht should be considered when making this decision and elaborate on whether or not those factors do or do not support the decision.

Propose other factors that should be considered when making this decision and elaborate on whether or not those factors do or do not support the decision.

Answer 1

Rate per unit.

Direct material = (75000 x 12)/50000 = $18

Direct labour = (100,000 x 12)/50000 = $24

Fixed overheads =150% x 24 =$36

Fixed overheads under buy proposal = 36 x 75% =$27

Calculation of profit under both proposals:

Particulars	Make	Buy
	Amount p.u($)	Amount p.u($)
A. Sales price	150	150
Purchase	0	60
Direct material	18	0
Direct labour	24	0
Variable overhead	7.5	0
Fixed overhead	36	27
B. Total cost	85.5	87
C. Profit (A-B)	64.5	63

As profit (per unit) is more if we make the product. Company is should make the product.

Other factors that should be considered when making this decision are

-Whether material cost will remain same , decrease, increase in coming years. As it will directly impact the cost and profit.

-Whether labour is available for whole year so as to continue the production with standards each month or year.

-What is the inflation rate for coming years .

-Demand for the production. If demand will fall company would have to low the sales price and it could lead to low profit.

If impact of these factors are positive , means not increasing cost and leading to same or more profit then company should make the product and vice-versa.